Background
The justification for a participation exemption is to eliminate double taxation of shareholders.
In any accounting period, a company may pay a form of corporate income tax on its taxable profit which reduces the amount of post-tax profit available for distribution by dividend to shareholders.
In the absence of a participation exemption, or other form of tax relief, shareholders may pay tax on the amount of dividend income received. This results in double taxation as the dividend is paid out of taxed profits of the company.
A participation exemption will typically provide that certain types of dividends are not taxed in the hands of shareholders. In addition, many participation exemption regimes provide that capital gains on shares are not taxed as long as a specified proportion of the company's share capital is held for a specified period.
A participation exemption may apply to qualifying shareholdings in overseas companies, domestic companies, or both.
Read more about this topic: Participation Exemption
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